Digging Out of the Hole

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A flurry of recent reports show a number of college endowments are beginning to rebound after taking a brutal hit during the recession, but even some of the top performers are struggling to reach the high-water marks of yesteryear.

The positive returns reported by numerous institutions for the 2010 fiscal year, which ended June 30, differ starkly from the nearly 19 percent losses colleges posted on average a year before. It’s hard to say, however, that happy days are here again. A subdued news release from Stanford University, for instance, pointed out that the 14.4 percent return – an unimaginable outcome two years ago – still meant the $13.8 billion endowment was significantly below its previous high of $17.2 billion.

“While we’re pleased with investment returns and endowment growth over the past year, Stanford’s endowment remains 20 percent smaller than it was two years ago,” Randy Livingston, vice president for business affairs and chief financial officer, said in the release.

The stark reality that even a very good year can't erase the damage done is likely to be the case for many colleges. Even a restrained celebration, however, marks a real departure – if only in mood.

“Certainly we’ve seen volatility in this past year as well, but overall institutions were able to eke out some real gains in the market,” said Matt Hamill, senior vice president of advocacy and issue analysis at the National Association of College and University Business Officers.

NACUBO, which partners with Commonfund Institute for a survey of endowments, won’t release its findings for the 2010 fiscal year until January. That aside, it’s hard to ignore what appear to be signs of a marked shift, Hamill said.

“We’re starting to see the thread of a pattern,” he said.

While many colleges make a routine of publicizing their endowment returns this time of year, far fewer will say much about them. A number of institutions sent releases to a host of national news organizations on their returns, only to refuse to discuss the matter further. Consequently, it’s difficult to discern whether colleges meaningfully recalibrated their investment strategies or simply stuck with the same basic asset allocations and achieved better results as the market rebounded.

The NACUBO/Commonfund survey should provide an overall view of whether strategies changed, but Hamill said he doesn’t expect big moves. If anything, the survey may demonstrate that colleges placed a higher priority on liquid assets more easily converted into cash, rather than alternative investments that didn’t provide institutions with the quick cash on hand some needed in the past year, Hamill said.

“I don’t think institutions have turned their investment strategies on their head,” he said.

Indeed, officials at Dickinson College say their 16.1 percent returns over the last year are part of a relatively consistent long-term strategy.

“This is cumulative. It is not just happening suddenly,” said William Durden, the college’s president.

Durden traces Dickinson’s results back to the early 2000s, when Dickinson elevated investing from a subcommittee to a full committee on the college’s board of trustees. The committee consulted with alumni who were working in emerging sectors, prompting the college to get more heavily involved in distressed debt, among other more exotic areas. It wasn’t long before Dickinson was engaged with the sorts of complex financial instruments that most colleges simply aren’t staffed to evaluate – and the head of the investing committee recognized an emerging potential risk, Durden said.

“He said, 'You know, things are getting little frothy here.… Let’s admit this is going to get very complex, and we’re going to need more day-to-day help,' ” Durden recalls.

Enter Investure, a firm founded by a longtime endowment manager at the University of Virginia, which now handles the assets of several foundations and colleges, including Dickinson's. The firm’s involvement has freed up board members – many of them captains of industry -- to think about big picture issues like global trends and the direction of the dollar, rather than the minutiae of investing strategy, said Annette Parker, chief financial officer at Dickinson.

“The board members are no longer doing the beauty pageant of, 'Which of these three [fund] managers are we going to hire?' ” she said.

Despite being pleased with last year’s results, Dickinson officials also acknowledge that they were not immune from the ravages of the financial crisis. The college’s endowment ended the fiscal year at $312 million, which is still about 10 percent off its $348 million pre-recession peak.

Dickinson is among a number of colleges whose returns this year have eclipsed those of Harvard University, the world’s wealthiest institution and a perennial favorite in the returns race. While a welcome departure from last year’s 29.8 percent decline, Harvard’s 11 percent investment growth still trailed the 13 percent median return for corporate pensions, endowments and foundations as reported by Wilshire Associates, a consulting firm in Santa Monica, Calif.

Other colleges that recently reported investment returns for the 2010 fiscal year include:

For Allegheny College, which saw a 19 percent endowment value decline in the 2009 fiscal year, the economic crisis hasn’t led to major changes in asset allocations, said David McInally, executive vice president and treasurer. Endowment returns increased by 12 percent in 2010, and that was more attributable to changes in market performance than to any radical rethinking, he said.

“We do still have faith in equities, both domestic and foreign,” McInally said. “And part of that is [because we ask] 'What’s the consequence of losing faith? What if all institutions like us decided we didn’t want to invest in businesses anymore?' That would not be good for the world economy.”

To the extent that endowments saw gains, much of the progress is attributable to market increases early in the fiscal year that were followed by shakier returns later on, said John Nelson, managing director of Moody’s Public Finance Group. On average, analysts expect fiscal year 2010 returns of 9 percent to 13 percent for colleges, but few are banking on double digit climbs reemerging as the norm for higher education, he said.

“I don’t think anyone in the endowment management world thinks we’re going to be back to 15 percent returns year in and year out,” Nelson said.

Moreover, even the colleges that are pleased with their returns have other financial concerns, like faltering government support, pressure to keep tuition down and fund-raising challenges, said John Griswold, executive director of the Commonfund Institute.

“You’ve got a lot of things that are creating a witches' brew at the moment,” he said.